How to Stop a 401(k) From Becoming a Tax Burden in Retirement
For decades, the standard retirement playbook has been simple: Max out your traditional 401(k), take the upfront deduction and let the IRS wait. Watching your taxable income shrink feels like an immediate win.
But follow that path for 30 years and you may arrive at retirement with an unwelcome discovery. A portfolio that is almost entirely pretax isn’t just a nest egg. It’s an income tax bill in waiting, and you don’t get to decide when it comes due.
I see this pattern often among successful savers. The problem isn’t that they saved too little. It’s that they saved in only one kind of account.
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How a pretax nest egg becomes a tax trap
Every dollar you withdraw from a traditional 401(k) or IRA is taxed as ordinary income. Once required minimum distributions (RMDs) begin, at 73 for most of today’s retirees and 75 for those born in 1960 or later, the IRS no longer waits for your permission.
Consider a married couple, both 75, with $4 million in traditional IRAs. Their RMD comes to roughly $163,000. Add $80,000 in Social Security benefits, up to 85% of which becomes taxable, and their modified adjusted gross income lands around $230,000. That’s above the $218,000 threshold that triggers Medicare’s IRMAA surcharges in 2026, raising Part B and Part D premiums for both spouses.
If one spouse dies, the RMDs keep coming, but the survivor files as single, with narrower brackets and an IRMAA threshold of just $109,000. This “widow’s penalty” hits pretax-heavy portfolios hardest.
Heirs feel the pressure too. Since the SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries, heirs generally must empty an inherited IRA within 10 years. A child who inherits a $1.5 million IRA at 50 could add $150,000 or more to their taxable income each year, right in their peak earning years.
The goal isn’t to minimize taxes this year. It’s to minimize them over your lifetime, and sometimes that means paying a bit more now to avoid paying far more later.
The case for three tax buckets
Because no one can reliably predict future tax brackets, markets or policy, the more durable approach is tax diversification: Spreading savings across three buckets.
Tax-deferred accounts, such as traditional 401(k)s and IRAs, lower your tax bill during peak earning years. Later withdrawals are taxed as ordinary income.
Taxable accounts, including individual, joint and trust brokerage accounts, are funded with after-tax dollars. They offer flexibility, with no early-withdrawal penalties, long-term capital gains rates and a step-up in cost basis for heirs.
Tax-free accounts, namely Roth IRAs, Roth 401(k)s and health savings accounts, are funded after tax, but qualified withdrawals are tax-free. Roth accounts carry no RMDs for the original owner, and heirs inherit them income-tax-free.
Holding all three gives you something a single-bucket strategy can’t: Control. In the years between retirement and claiming Social Security, you can draw from pretax accounts deliberately, filling lower brackets without spilling into higher ones.
Large purchases get easier, too. If you’re in the 24% federal bracket and need $100,000 for a new roof, you’d have to withdraw roughly $132,000 from a traditional IRA to net that amount after federal tax, which could push you into an IRMAA tier. Blending the withdrawal across all three buckets keeps both your effective rate and your Medicare premiums in check.
What I tell savers to do now
Split your contributions. If your employer plan offers a Roth 401(k), consider directing a portion of your contributions there. The 2026 employee limit is $24,500 across traditional and Roth combined. Starting this year, workers 50 and older who earned more than $150,000 in FICA wages the prior year must make catch-up contributions on a Roth basis, so many high earners are getting a Roth bucket whether they planned for one or not.
Use the back door. Direct Roth IRA contributions phase out in 2026 between $242,000 and $252,000 of modified AGI for joint filers ($153,000 to $168,000 for single filers). Above that, a backdoor Roth IRA remains available, and if your 401(k) permits after-tax contributions and in-plan conversions, a mega-backdoor Roth can move far larger sums.
Find your conversion window. The years after you stop working but before RMDs and Social Security begin are often your lowest-income years. Converting pretax dollars to Roth during that stretch, up to the top of a target bracket, locks in today’s known rates.
Build the taxable bucket. A brokerage account alongside your 401(k) gives you access to funds before 59½ and a step-up in basis for heirs.
What not to do
Don’t convert without a plan. A large Roth conversion can push you into a higher bracket and, if you’re 63 or older, raise your Medicare premiums, since IRMAA looks back two years. And when you can, pay the conversion tax with outside cash rather than from the IRA itself to preserve more tax-free growth.
The bottom line
A lifetime tax projection doesn’t require a crystal ball. If nearly all of your savings sit in pretax accounts, consider taking steps today to diversify across all three tax buckets.
Even modest changes, such as redirecting part of your 401(k) contributions to Roth or opening a taxable brokerage account, can give you far more control over your tax bill in retirement and leave a cleaner legacy for your heirs.
